Monday, April 16, 2012

Response to an Economics Question

For my economics assignment, we have to go in pairs and make presentations. For each presentation, the presenters have to summarize an article about an article on a current economic event, and pose two discussion questions .

Today, the presenters summarized the above article, and asked: "Do you think this pilot program will be successful? Will homeowners and investors be interested?"

My Response
In my opinion, this program will be successful, as it will definitely attract both homeowners and investors.
For homeowners, they get to stay in their houses with rents “at or below market prices,” which is probably one of the best outcomes that they can get. Not only do they get to pay (possibly) lower rents, they also do not have to go through the hassle of getting kicked out of their houses and looking for another place in a hurry. So unless the rents are too expensive even after the discounts, there’s no reason why homeowners wouldn’t be interested.

For investors, this seems like a pretty good deal as well, as housing prices are expected to rise after three years. This means that after three years, investors will likely be able to sell the properties for more than what they have paid, and that they would have received three years of rents. Rising housing prices and three years of guaranteed rent (income)? Seems like a very good investment.

If investors and homeowners participate in the program, Bank of American will be better off too. They get to get rid of the properties in a short time, and avoid creating “neighbourhood blights” and accelerating “downdrafts in housing prices.”

In short, this program is very efficient. It makes everyone better off with the same amount of resources. So it will definitely attract both homeowners and investors, thus being successful.

(This program wouldn’t be successful for a long time, though. As soon as the housing prices are expected to drop, the program will lose its appeals to the investors. Who would want to invest in a home whose value may drop severely after three years? In this case, the opportunity cost for being bound to a contract would probably be higher than that of not receiving three years of stable rent. And therefore, the program will fail to attract investors.)